Stocks Close Lower on Weakness in Retailers and Hawkish Fed Comments

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Wednesday closed down -0.83%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.12%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.45%. 

Stock indexes on Wednesday posted moderate losses as a slump in retailer stocks weighed on the overall market.  Target plunged more than -13% after reporting weaker-than-expected Q3 adjusted EPS and forecasting a decline in Q4 comparable same-store sales.  Also, Advanced Auto Parts sank more than -15% after reporting disappointing Q3 earnings results.

Meanwhile, losses in semiconductor stocks Wednesday weighed on technology stocks after Micron Technology warned that its market outlook for 2023 had weakened.  Wednesday’s U.S. economic news was mixed for stocks.

A rally in food packaging stocks limited losses in the overall market on signs the companies are able to pass along their inflated input costs to consumers, preserving their sales and earnings.  In addition, a decline in T-note yields was supportive for stocks as the 10-year T-note yield dropped to a 6-week low of 3.670%.

Stock indexes initially rose in overnight trading on reduced geopolitical risks after NATO said it saw no indication that a missile that struck Poland was an intentional attack.  NATO said the missile was likely fired by Ukrainian air defenses to defend Ukrainian territory against Russian cruise missile attacks.

U.S. Oct retail sales rose +1.3% m/m, stronger than expectations of +1.0% m/m and the biggest increase in 8 months.  Also, Oct retail sales ex-autos rose +1.3% m/m, stronger than expectations of +0.5% m/m.

The U.S. Oct import price ex-petroleum index fell -0.2% m/m, the sixth consecutive month prices have fallen but a smaller decline than expectations of -0.8% m/m.

U.S. Oct manufacturing production rose +0.1% m/m, weaker than expectations of +0.2% m/m. Also, Sep manufacturing production was revised lower to +0.2% m/m from the initially reported +0.4% m/m.

The U.S. Nov NAHB housing market index fell -5 to a 2-1/2 year low of 33, weaker than expectations of 36.

Fed comments Wednesday were mostly bearish for stocks.  New York Fed President Williams said the Fed's focus on fighting inflation is "of paramount importance" and "using monetary policy to mitigate financial stability vulnerabilities can lead to unfavorable outcomes for the economy."  Also, San Francisco Fed President Daly said, "a pause in Fed rate hikes is not part of the discussion now," and 4.75% to 5.25% was a "reasonable" range for where policymakers could lift interest rates and then go on hold. 

On the bullish side, Fed Governor Waller said economic data over the past few weeks have made him "more comfortable stepping down to a 50 bp rate hike" at the December FOMC meeting.

Today’s stock movers…

Advanced Auto Parts (AAP) closed down more than -15% Wednesday to lead losers in the S&P 500 after reporting Q3 adjusted EPS of $2.84, well below the consensus of $3.35.  The company also cut its full-year adjusted EPS forecast to $12.60-$12.80 from a prior estimate of $12.75-$13.25, weaker than the consensus of $13.01. 

Retailer stocks slumped Wednesday after Target reported Q3 adjusted EPS of $1.54, well below the consensus of $2.15, and forecasted a decline to the low single digits for Q4 comparative same-store sales. Target (TGT) closed down more than -13%.  Also, Best Buy (BBY) is down more than -8%. In addition, Macy’s (M) closed down more than -7%. Finally, Ross Stores (ROST) and Dollar Tree (DLTR) closed down more than -1%.

Cruise line operators are falling today after Carnival announced a private offering of $1 billion of 5.75% convertible senior notes due December 1. 2027.  As a result, Carnival (CCL) closed down more than -13%.  Also, Norwegian Cruise Line Holdings (NCLH) closed down more than -3%, and Royal Caribbean Cruises Ltd (RCL) closed down nearly -1%. 

Semiconductor stocks were under pressure Wednesday after Micron Technology warned that its market outlook for 2023 had weakened.  Lam Research (LRCX) and Micron Technology (MU) closed down more than -6%.  Also, Align Technology (ALGN), Applied Materials (AMAT), and Marvell Technology (MRVL) closed down more than -5%.  In addition, Nvidia (NVDA), Advanced Micro Devices (AMD), Qualcomm (QCOM), KLA Corp (KLA), NXP Semiconductors NV (NXPI), and Microchip Technology (MCHP) closed down more than -4%.

TJX Cos (TJX) closed up more than +5% Wednesday to lead gainers in the S&P 500 after reporting Q3 EPS of 91 cents, better than the consensus of 84 cents, and raising its full-year EPS forecast to $2.93-$2.97 from a prior estimate of $2.87-$2.95.

Packaged food stocks moved higher Wednesday on signs that food companies are able to pass along their inflated input costs to consumers, boosting their sales and earnings.  Campbell Soup (CPB) closed up more than +3%.  Also, Hershey Co (HSY), General Mills (GIS), and JM Smucker (SJM) closed up more than +2%. In addition, Kraft Heinz (KHC) closed up more than +1% to lead gainers in the Nasdaq 100.  Finally, Kellogg (K), Conagra Brands (CAG), and Hormel Foods (HRL) closed up more than +1%.   

Lowe’s (LOW) closed up more than +3% after reporting Q3 adjusted EPS of $3.27, stronger than the consensus of $3.09, and raising its full-year adjusted EPS estimate to $13.65-$13.80 from a previous estimate of $13.10-$13.60.

Discover Financial Services (DFS) closed up more than +2% after it said the investigation into its student-loan servicing practices had been completed, and it will resume stock buybacks.

Across the markets…

Dec 10-year T-notes (ZNZ22) on Wednesday closed up +20.5 ticks, and the 10-year T-note yield fell -8.4 bp to 3.686%. Dec T-notes Wednesday rallied to a 6-week high, and the 10-year T-note yield fell to a 6-week low of 3.670%.  T-notes had carry-over support Wednesday from a rally in 10-year UK gilts to a 2-month high.  An easing of inflation concerns also boosted T-notes after Wednesday’s news showed that the U.S. Oct import price index ex-petroleum fell -0.2% m/m, the sixth consecutive month prices have fallen.  In addition, inflation expectations fell after the 10-year breakeven inflation rate dropped to a 1-month low of 2.312%.

T-notes also found support Wednesday on strong demand for the Treasury’s $15 billion auction of 20-year T-bonds.  The auction had a bid-to-cover ratio of 2.64, above the 10-auction average of 2.56. Finally, weakness in stocks Wednesday fueled some safe-haven demand for T-notes.

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